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  • Weak And Vulnerable

    27 Dec 2016
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    The US economy remains weak and vulnerable. The new Macro Watch video explains why. The economy is weak because credit growth remains too sluggish to drive the economy as it did in the past. With interest rates near record low levels, credit should be expanding much more quickly than it is. In this video, we look at credit growth on a sector by sector basis, and project growth rates out to the end of 2017. While there has been some improvement since the last Macro Watch Credit Update six months ago, there has not been enough. The outlook for the economy remains depressed. The economy is vulnerable because if interest rates now begin to rise, credit growth would slow and the economy would fall back into recession. Worse still, any inflation shock – such as the one that would result from the imposition of trade tariffs – would cause interest rates to soar and the economy to plunge into a severe Depression. The unfortunate truth is that the economy remains on government life support. It still depends on government borrowing and interest rates held at ultra low levels by central bank intervention. Here’s one interesting example: the government has been providing “stealth stimulus” to the economy by aggressively financing Student Loans since soon after the economic crisis began. As a result, the government now owns 73% of all student loans. For decades, Credit Growth Has Driven Economic Growth. If you are a Macro Watch subscriber, log in now and watch the latest credit update. You will see why the US economic slump will not end soon.
  • Deregulation, Derivatives And The Threat Of Mass Destruction

    27 Dec 2016
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    Eight years after the global financial system came very close to being destroyed by out of control speculation in the unregulated derivatives market, there is still nearly Half A Quadrillion Dollars worth of derivatives trading in opaque Over The Counter (OTC) markets. Next week I will upload a new Macro Watch video describing what has been done since the crisis to bring these “financial instruments of mass destruction” under control. Some progress has been made, but it has been incredibly slow. The vast majority of all derivatives still do not trade through exchanges. Consequently, the continuing lack of transparency means there is still a real risk that derivatives are being used to illegally manipulate interest rates, currencies and commodities. Moreover, margin requirements are still not in force. Margins provide a buffer that reduces counterparty risks. The lack of margins increases the danger that the failure of one counterparty could spread contagion and result in systemic collapse, as the near-failure of AIG came close to doing in 2008. My second book, The Corruption of Capitalism (2009), contained a chapter called Deregulation, Derivatives And The Threat Of Mass Destruction. It describes how derivatives were deregulated and points a finger at those most responsible. Alan Greenspan is heavily criticized for his role in the fiasco. This chapter serves as a good introduction to next week’s video. It’s a truly incredible story. I hope you will read it.
  • Derivatives Reform: Real or Razzmatazz?

    27 Dec 2016
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    Eight years after the near implosion of the international financial system came close to plunging the world into a New Great Depression, and six years after the Dodd-Frank Wall Street Reform and Consumer Protections Act became law, Half A Quadrillion Dollars worth of derivatives contracts are still trading Over-The-Counter (OTC) with limited transparency and insufficient oversight. The latest Macro Watch video examines what progress has been made in reducing the threat posed by these “financial weapons of mass destruction”. We begin by asking why derivatives were deregulated in the first place. Was it simply stupidity? Was it greed and political corruption? Or was there more to it than that? Next we see a breakdown of the participants in the OTC derivatives market today. We find that non-financial customers hold only 5% of all contracts, while financial institutions hold 95%. That raises questions about the effectiveness of the Volcker Rule, which was intended to limit proprietary trading by banks. Finally, we look at the post-crisis derivatives reform agenda, both in the United States and at the international level. What we find is that reform progress has been glacial and that the risk to the global economy posed by hundreds of trillions of dollars of derivatives contracts remains very high.
  • Derivatives Reform Razzle-Dazzle

    27 Dec 2016
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    Derivatives Reform is enormously important for the future of our economic system for two reasons. First, without the enforcement of effective reform, we cannot be certain that our largest financial institutions are solvent. We now know that if any one of them fails, they will all fail. We also know that a systemic financial sector collapse would result in a new global Great Depression. Second, without full transparency, we cannot know if prices are being determined fairly by the forces of real supply and demand or if they are being manipulated by banks, corporations and/or governments. Without transparency, commodity prices, interest rates and currency values can all be easily controlled behind a wall of trillions of dollars worth of contracts that no one can see through. Eight years after a financial sector meltdown that brought the world to the brink of a New Great Depression, and six years after the passage of the Dodd-Frank Act, in my opinion, the derivatives market, still $550 trillion in size, is just as much a threat to the global economy now as it was in 2008. Furthermore, the ability to use OTC derivatives to manipulate interest rates, currency values and commodity prices remains largely undiminished. Laws have been enacted to make the derivatives market safer, but implementation has been glacial. Thus far the actual effectiveness of trade reporting, central clearing and margin requirements is extremely limited. Whether the risks to the global economy created by hundreds of trillions of dollars worth of OTC derivatives is really reduced during the years ahead will depend on government enforcement of the spirit and the letter of the law. Unfortunately, in late 2016, it is still unclear whether the government is regulating the banks or if the banks are regulating the government. Only time will tell whether the reforms will ever actually be enforced or whether all the noise about reform is only razzle-dazzle designed to distract the public while business continues as usual. So far, it seems to me that it’s still business as usual.
  • President Trump, You Can Make America’s Economy Great Again. Here’s How

    27 Dec 2016
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    I have just uploaded a Macro Watch video in the form of a presentation to President-elect Trump. This is the most important video I have ever made. Here’s how it begins: President Trump, You CAN make America’s economy great again. Here’s how: INVEST, Mr. President – not only in infrastructure but also in the industries and technologies of the future. You have been elected President at a unique moment in history that gives the government of the United States the ability to borrow and invest in the US economy on a scale not only large enough to rebuild America’s infrastructure, but large enough to also induce a new technological revolution that would restructure the entire economy and make it great again, greater than ever! If you grasp this opportunity, the United States will have unassailable supremacy in the industries of the future; you will lock in another American Century; and you will improve the well being of every American – and the well being of every person on this planet. However, you have also been elected at a time when the global economy is in grave danger of collapsing into a depression, one from which it might not recover for decades – if ever. One misstep on your part and instead of making the economy great again, you will make the Great Depression again. Here’s what you need to know and to act on to succeed. The global economy is an enormous economic bubble that has been inflated by Credit. If the Credit contracts, the bubble will pop and the New Great Depression will begin. If interest rates go up significantly, the bubble will pop and the New Great Depression will begin. One wrong move on your part and the economy will spiral out of control into a depression. It won’t be a short and sharp depression like 1921. It will be long and devastating like 1929 to 1945. That’s the bad news. Here’s the good news. You are absolutely right to call for government investment in infrastructure. DON’T STOP THERE. During your administration, the government can borrow and invest trillions of dollars in the US economy without causing inflation. The combination of Globalization and Fiat Money makes this possible. You not only have the opportunity to rebuild American infrastructure so that it is second to none as you promised to do in your victory speech. You also have the opportunity to invest in 21st century industries and technologies on a scale that is too big to fail, thereby guaranteeing that the United States remains the most prosperous and powerful country in the world for many decades to come. In the past, the government could not run large budget deficits without causing high rates of destabilizing inflation. Today, the United States government can borrow and invest many trillions of dollars at little to no cost – and do so without causing inflation. In this presentation, I’ll explain why. I’ll also describe the kind of government investment that is required to pull the United States and the world out of this economic crisis – and the extraordinary benefits that such investments would produce.
  • Voodoo Economics? Voodoo Two Won’t Do

    27 Dec 2016
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    Voodoo Economics, the combination of tax cuts and increased military spending, worked for President Reagan, but would it work for President Trump? The latest Macro Watch video argues that it might in the short run, but that the risks those policies pose to the economy and to investors are much greater now than they were in 1981. In fact, Voodoo Economics Round Two could lead to a collapse in asset prices and a disastrous economic breakdown.
  • Trump’s Recipe For Disaster

    27 Dec 2016
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    The global economic bubble came very close to collapsing into a new Great Depression in 2008. That disaster was prevented by ultra loose Monetary Policy. Central banks slashed short-term interest rates to very close to 0% and then “printed” trillions of dollars worth of new money and used it to buy financial assets. That strategy allowed credit to expand and caused asset prices to soar, thereby reflating the global economic bubble and staving off economic collapse. What happens next will depend on interest rates. If interest rates rise significantly, credit will contract, asset prices will plunge and the economy will spiral into crisis.
  • Interview: Yuan Devaluation Likely

    14 Oct 2016
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    An Interview published in Hankook Ilbo I have just returned from speaking at The Third China Forum in Seoul, an event hosted by the Korean conglomerate Hankook Ilbo. The theme of the conference was “The Shift In China’s Paradigm”. Much of the discussion focused on the outlook for the Yuan. I came away with the impression that a further devaluation of the Yuan is increasingly likely. As part of this event, the Hankook Ilbo newspaper interviewed me. The interview was published in Korean on November 3rd. Please find the interview below:
  • Asia & The Slump In World Trade

    14 Oct 2016
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    Asia is being hit hard by the slump in world trade that has resulted from the sharp economic slowdown in China. In the latest Macro Watch video, uploaded today, we take a look at the impact this trade crash is having on seven Asian countries: Japan, South Korea, Taiwan, Singapore, Malaysia, Thailand and Vietnam. For each country, we look at: Exports Imports The Current Account Balance Inflation GDP The Currency, and The Stock Market Exports and imports have both plunged. Thus far, however, economic growth and stock prices have held up better than would have been expected. Currencies have been the big losers. With no end in sight for the recession in China, the outlook for the rest of Asia is discouraging. Many countries are likely to fall into recession and deflation. Stocks will probably fall further. And currencies look to have further to depreciate, especially if the Fed hikes interest rates or if China devalues its currency again. Vietnam alone stands out as the exception. Its economic prospects appear much more promising.
  • How My Career Shaped My Views On The Global Economy

    08 Sep 2016
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    In the new Macro Watch video uploaded today, I describe how my 30-year career in the investment industry has shaped my views on what drives the global economy and the financial markets. There have been several important “aha” moments:
  • Negative Liquidity Will Drive Stocks Lower

    08 Sep 2016
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    Liquidity in the United States turned negative in the fourth quarter of 2015. I believe this played an important role in the severe stock market selloff that began around that time. If so, the outlook for stocks and other asset prices is disturbing since Liquidity appears likely to remain negative FOR THE NEXT FIVE YEARS. In the new Macro Watch video, uploaded today, I have updated my Liquidity Gauge projections out to 2020. They shows that, even under a best-case scenario, Liquidity will remain negative out as far as the eye can see. This will create a much more difficult environment for asset prices. Years of excess Liquidity have driven stocks, property, Net Worth and the economy higher. Those days are gone. As Liquidity now contracts, asset prices are likely to fall, pulling the economy back into recession. Only a very steep drop in US government bond yields seems capable of keeping stock prices and the economy afloat. Investors should not be surprised if the Fed soon acts to drive bond yields lower – either through QE 4 or by threatening to impose negative interest rates on bank reserves. The Fed has been driving the economy by pushing up asset prices since 2008. They won’t sit idly by if asset prices now begin to plunge. This video explains significant revisions to the projections for the budget deficit and the current account deficit (two of the three components of the Liquidity Gauge). If you are a Macro Watch subscriber, log in and watch this 25-minute video now. There you will find 38 downloadable charts with all the details.
  • Death Spiral? Make That Plural

    08 Sep 2016
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    Last week Citi made headlines by publishing a report claiming the global economy is trapped in a “Death Spiral”. The timing of the report was perfect. Financial markets were in full PANIC! Oil fell to $26 per barrel, 10-year US government bond yields dropped to 1.52%, the MSCI World Equity Index fell into a bear market down 20% from its peak and bank shares in Europe and the US crashed as investors began to question the banking industry’s solvency in a negative interest rate world.
  • Negative Interest Rates: How Did This Happen?

    08 Sep 2016
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    Until recently, negative interest rates were considered inconceivable. Now, however, $7 trillion worth of bonds are trading at negative yields. That means the owners of those bonds are guaranteed to lose money unless interest rates plunge even further. The latest Macro Watch video, uploaded today, explains how this disaster came about. There are five reasons interest rates have fallen into negative territory: - Globalization circumvents the domestic bottlenecks that used to cause inflation. - Manufacturing in ultra low wage countries drives down the cost of production and product prices. - Fiat money creation produces an economic boom that creates excess capacity and falling product prices. - Fiat money creation changes the Supply and Demand balance for Money and pushes down yields. - The imposition of a Negative Interest Rate Policy (NIRP) by some central banks puts downward pressure on all interest rates. Thus far, five central banks, including the European Central Bank and the Bank of Japan, have imposed negative interest rates on the reserves commercial banks hold on deposit at those central banks. Fears are growing that the Fed also intends to introduce a Negative Interest Rate Policy.
  • From China’s Economic Crisis to America’s Political Crisis, The Financial Sense Podcast

    25 Aug 2016
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    I recently had a great, wide-ranging conversation with Cris Sheridan of Financial Sense Newshour. We began with the economic crisis in China and moved on to the political crisis in the United States, discussing the market implications of both – and much more. It’s a good interview. I hope you will take the time to listen to it now. Here are some of the topics addressed: - China’s economic hard landing began in 2015. (Macro Watch is now publishing a series of videos on the economic crisis in China.) - The two insurmountable obstacles China’s economy is facing. - China’s Yuan devaluation blackmail. - The Dollar Standard Boom and Bust (1980 to 2016) - The Revolution in American Politics. - The American backlash against free trade. - The possibility that protectionism will cause a burst of inflation that will pop the global economic bubble. - A better way to boost global aggregate demand. - The most important thing to understand to invest successfully. - Helicopter Money. - Why the overvalued stock market won’t crash. - A better investment than gold.
  • China’s Economic Crisis, Part 4: One World Is Not Enough

    25 Aug 2016
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    China’s economy is freakishly unbalanced. Investment (Gross Fixed Capital Formation) makes up 44% of China’s GDP, whereas Household Consumption makes up only 38% of GDP. For the world as a whole, Investment makes up just 24% of global GDP, while Household Consumption makes up 57%. Perhaps not since the Pharaohs built the Pyramids with slave labor has Investment made up such a large share of a country’s economy and Household Consumption made up so little. In the past, China was able to export its surplus production to the rest of the world. Now, however, the global economy is too weak to continue absorbing more and more Chinese exports every year. Moreover, trade tensions are rising dramatically. The political backlash against free trade and against the negative consequences of Globalization is threatening to overthrow the pro-free market political establishment in the United States and across Europe. China is not going to be able to continue to Invest more than it Consumes by dumping the surplus abroad. In 2015, China’s exports fell by 9%. Chinese policymakers have said they will change China’s economic growth model so that, going forward, the economy will be driven by Consumption instead of Investment. But, that won’t be possible. Median personal disposable income in China is only US$8.13 per person per day. That means income is far too low to support a transition to Consumption-driven growth. Instead, China is more likely to find itself following the Japanese model of the past 26 years, one that relies on large government budget deficits and surging government debt. Deficit spending has kept Japan from collapsing into a Great Depression since its economic bubble popped in 1990. China appears to have few other options but to follow the Japan example if it is to keep its economy from spiraling into crisis.
  • China’s Economic Crisis, Part 3: The Risks Of Chinese QE

    25 Aug 2016
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    China’s economic growth engine is fuelled by extraordinarily large amounts of credit. In 2015, it took RMB 15.4 trillion (US$2.4 trillion) of credit growth to generate RMB 4.1 trillion (US$631 billion) of economic growth. In this video, the third in a series on the economic crisis now unfolding in China, we consider how much new credit growth will be required to keep China’s economy growing. The amounts are staggering. If credit were to continue to grow at the 2015 growth rate of 12.6% a year, the equivalent of US$17 trillion would be lent out over the next five years. Credit growth on that scale would be very difficult to finance and even more difficult to invest profitably. In the past, China relied on its trade surplus and on foreign direct investment to fund its credit expansion. Last year, however, there was massive capital flight out of China for the first time in modern history. That caused liquidity conditions to tighten.
  • China’s Economic Crisis: Part 2, The Colossal Boom (1990 – 2014)

    25 Aug 2016
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    Chinese Investment increased 50-fold between 1990 and 2014. Investment (i.e. Gross Fixed Capital Formation or GFCF) in China grew from US$92 billion in 1990 to US$4.6 trillion in 2014. During the last 25 years in China: - The Gross Output Value of Construction increased by 134 times, growing at an average annual rate of 21%. - Building Area Under Construction increased by 33 times, at an average annual rate of 15%. - Steel Production increased by 12 times, at an average rate of 11% growth per year. Consequently, China now has 50% of global steel capacity. - Cement Production increased 12-fold, growing by an average annual rate of 11%. During just three years (2011 to 2013), China produced more cement than the United States did during the entire 20th Century. China now has 59% of global cement capacity.
  • The China Crisis Series (Part One)

    25 Aug 2016
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    China’s economy resembles a spinning top that is running out of momentum. It is wobbling and gyrating erratically. A stock market crash, diminishing returns on credit, a plunge in imports, capital flight and currency volatility are all signs that China’s great economic boom is now coming to an end. In all probability, this is just the beginning of what is likely to be a very protracted economic slump. Today I have uploaded the first in a series of Macro Watch videos that will explain the nature of the economic crisis now unfolding in China. The Chinese “miracle” was fuelled by extraordinarily rapid credit growth over the last 25 years. This video describes how that credit was financed. By analyzing China’s Balance Of Payments and the policies of the People’s Bank Of China, it identifies the sources of the money that financed the boom. The next video will show how that credit was used, or “where the money went”. The third video in the series will discuss the two insurmountable constraints that are bringing Chinese growth to an end. China’s economy need not collapse into a Chinese Great Depression to produce a global economic crisis, although the possibility of economic collapse in China cannot be ruled out. The 17% contraction in Chinese imports last year was already enough to tip the global economy into recession. The consequences of this economic hard landing in China will be felt in ever corner of the world.
  • Frank Answers To Tough Questions: Free McAlvany Podcast

    25 Aug 2016
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    My friend David McAlvany interviewed me for the highly respected McAlvany Weekly Commentary a few days ago. It was a great conversation. He asked me a series of excellent, tough questions. You will find many of my answers more frank than usual – in part, because some of them were given after I thought the mic had been turned off. The interview was better as a result. We covered a wide range of important topics: - The great Dollar Standard Boom & Bust Cycle behind the current global economic crisis - The details of China’s economic Hard Landing (as discussed in the recent 5-video Macro Watch series) - The exhaustion of Creditism – in the US and around the world - Why schools of economic thought developed in the 18th, 19th and 20th centuries do not provide the solution to our 21st century economic crisis - A modern strategy to achieve unprecedented prosperity Investing successfully in a world where asset prices float on an ocean of fiat money
  • Chimerica In Crisis

    25 Aug 2016
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    Chimerica is a term coined by the historian Niall Ferguson in 2006 to describe the economic relationship between the United States and China. Ferguson wrote: “Think of the United States and the People’s Republic not as two countries, but as one: Chimerica. It’s quite a place: just 13% of the world’s land surface, but a quarter of its population and fully a third of its economic output.” Indeed, looked at this way, Chimerica is the greatest economic superpower the world has ever known. Chimerican GDP is now $28 trillion – 36% of world GDP. Total credit in Chimerica is more than $85 trillion and Chimerican central bank assets are nearly $10 trillion. Without question, Chimerica has transformed the world. Chimerica is now on the brink of crisis, however. It is at risk of collapsing into a severe recession. If it does, the global ramifications will be devastating. The latest Macro Watch video (uploaded today) analyzes this US-Chinese relationship by considering: - What Chimerica is - How it emerged - Who has benefited and who has lost out because of Chimerica - How large it has become - How Chimerica was impacted by the crisis of 2008 - How it evolved afterwards - And why Chimerica is now falling into crisis
  • Forget Brexit, China’s The Real Crisis

    25 Aug 2016
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    Brexit has been dominating the world’s business headlines during the past few weeks. But the impact of Brexit on the global economy is likely to be relatively minor compared with the coming fallout from the economic Hard Landing now underway in China. Macro Watch has just concluded a five-part series on China’s economic crisis. Today, I would like to make the first of those videos freely available to everyone who subscribes to this blog.